5 key takeaways from RBI’s annual report for 2015-16

The Reserve Bank of India is the backbone of financial institutions in India. It has a wealth of knowledge that can come quite handy for investors.

Recently, the RBI published its annual report for 2015-16. It made some interesting remarks in the report that can be useful for investors. It highlighted the three key challenges facing India today and suggested some measures that can be taken.

Here are five key takeaways from the annual report:

Economic growth:

India is one of the fastest growing economies in the world today. It is even showing signs of faster growth.
However, the RBI suggests that the growth is still below potential.

Meaning, India can do much better. “The key weakness is in investment," the RBI said. Companies have not planned new investments because their existing factories are not being used fully. This is called capacity utilisation. All this resulted in a slow growth in industrial productivity too.

Forecast for 2016-17:

That said, the RBI is positive about the future prospects. This is thanks to the Seventh Pay Commission and better-than-anticipated agricultural growth. These two factors can help consumer demand. This, then, translates to higher corporate profits and faster economic growth. “With final demand picking up, capacity utilisation is likely to increase, and so will investment," the RBI said. This could find help in recent reforms like the Goods and Services Tax (GST) and 100% FDI in various sectors.

Inflationary challenge:

India’s other challenge is on the inflation front, the RBI said. Right now, inflation is hovering at 5-6% levels. The RBI plans to reduce it 5% by March 2017 and to 4% the year after. This, however, could face a challenge because of the Seventh Pay Commission. People will have more money in their hands because of higher salaries. This could lead to a rise in prices because of higher demand.

Interest rate cuts:

The RBI emphasised on the need for lower inflation. This is the only way the RBI will have any room for rate cuts. After all, deposit rates too fall along with an overall interest rate cut. So, without a fall in inflation, depositors would not get positive real interest rate. This is the actual return you get after taking into account inflation. Moreover, banks have not been able to pass on the interest rate cuts. They are still feeling the pinch of bad loans and low corporate demand.

Bad loans:

The third challenge facing India is the rampant bad loans. This puts a lot of stress on banks’ profitability. Already banks are facing low demand for loans. The additional stress of bad loans prevents banks from lending freely, the RBI noted. This is why, cleaning up bad loans is one of the biggest priorities for the RBI in the short-term. This way, banks will also have the capacity to lower their own interest rates.

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Rs 65,876 crore

Like any other financial institution, the RBI has to report its financials too. It has to take stock of all the assets on board like gold, foreign currency, etc., as well as liabilities like bonds issued. Taking all this into account, the RBI reported a surplus of Rs 65,876 crore for the year ended June 2016. This is a 12.25% growth from the previous year. The surplus can be attributed to the increase in investments by Indians as well as foreign exchange gains.

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